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HMRC internal manual

International Manual

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HM Revenue & Customs
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Intra-group funding: group finance companies and the treasury function: Risk assessment

The general principles behind the risk assessment of treasury and group finance companies are no different from transfer pricing risk assessments of other businesses, and the general indicators of risk apply to these companies as they do to other businesses (see INTM461000 onwards).

The first step in any risk assessment should be a functional analysis based on available information, with the goal of forming a preliminary view of where the company sits on the scale between a full treasury management company and a simple conduit. The actual return from the activities should be measured against the arm’s length return for the functions performed and risks taken on. Ideally the risk assessment should look at a number of years to put in context any one-off events and to give a deeper understanding of the business.

In general consistent but low margin returns should be expected in simple low risk cases. For group finance companies at the other end of the spectrum returns can be more volatile.

The capitalisation of the treasury or finance company will need to be considered. (see INTM503060)

The treasury group or finance company may provide ancillary services of the type mentioned in INTM503020 to other group companies, where a recharge or cost plus reward may be appropriate.

UK multinational with overseas finance subsidiary

Where a UK multinational locates its finance subsidiary abroad consideration should be given to the following questions:

  • Is the subsidiary actually UK resident? (see INTM120000)
  • Is the subsidiary a Controlled Foreign Company (‘CFC’)? (see INTM201000)

Overseas multinational with UK finance subsidiary

As well as considering transfer pricing risks, where an overseas multinational locates its finance subsidiary in the UK the following risks should be considered

  • Thin capitalisation (see INTM503060)
  • Whether the arrangements between the UK and its overseas associates are such that the group is trading in the UK through the UK finance company as their dependent agent (see INTM266140 on agent as permanent establishment)

Conduit companies

It may evident from the factual and functional analysis that the finance company undertakes minimal functions and carries little if any risk. If this is the case the company may not be entitled to the beneficial ownership of the interest receipt and the structure may have been put in place to obtain treaty benefits. (See INTM332000). Establishing whether an entity is entitled to the beneficial ownership of income also requires a full functional and factual analysis of the recipient’s rights to enjoy income, including sight of all the relevant agreements relating to the process.

In the case of most treaties, the recipient of the interest has to be beneficial owner of the income as a condition of obtaining clearance under the treaty to pay interest without deduction of withholding tax (or with WHT at a lower rate). If a conduit company already has clearances in place, they will be lost if upon enquiry it cannot demonstrate beneficial ownership. The concept is explained from INTM303010 onwards.

HMRC’s approach where it is found that such a company does not have beneficial ownership will depend on establishing whether the conduit has a commercial or an avoidance intent. See INTM332080 for examples of how conduit companies might be treated, depending on the facts and circumstances.

Financial trades

Cases should be referred to CTIAA Business International before it is accepted that group finance companies are carrying on a trade of borrowing and lending, making and receiving loans on current account. Such claims should be looked critically.

In arguing that the company is trading as a financial concern, the group finance company will have to meet the test laid down in CIR v Livingstone 11TC538, in terms of the characteristics of the trade which the company is purporting to carry on:

‘Whether the operations involved … are of the same kind, and carried on in the same way, as those which are characteristic of ordinary trading in the line of business in which the venture was made’.

For example

  • borrowing and lending are more likely to be closely matched in terms of loan conditions, timing of interest and principal payments, etc, where a company is only performing a conduit function
  • overall sums may be too small to constitute a viable financial trade
  • the company does not behave like a regulated business: it may not have adequate reserves to cover bad debts, or it may not maintain an adequate liquidity reserve
  • it might deal exclusively with its own fellow subsidiaries, being unavailable to third party customers.

All the relevant factors have to be considered and no one factor will necessarily be decisive. The Business Income Manual includes useful material on the “badges of trade”, from BIM20200 onwards.

Other risks

The following issues may be present wherever there are financial transactions but, given that financial transactions are the essence of the businesses of treasury and group finance companies, these will be worth special consideration.

  • Tax arbitrage (see INTM590000onwards) where finance is provided through the use of hybrid entities or through hybrid instruments
  • Unallowable purpose (see CFM38100 onwards) where the loan relationship has a purpose which is not amongst the business or other commercial purposes of the company.
  • Disguised interest
  • Group mismatches